Tax Credits and Fraud Create Challenges for IRS

The IRS processed most tax returns on a timely basis during the last tax season, but challenges included problems with tax credits and more fraud attempts than the previous year.

As of April 28, 2012, the IRS had received more than 133.4 million individual income tax returns and had issued about $269 billion in tax refunds, said the Treasury Inspector General for Tax Administration (TIGTA) in a new report. For the majority of filers, tax returns were processed within forty-five days, but some who filed electronically early in the season experienced delays due to problems with computer filters established to identify fraud.

The IRS determined that these filters were incorrectly identifying some taxpayers. The problem has since been corrected. Peggy Bogadi, commissioner of the IRS Wage and Investment Division, said in a written response to the audit that the filters more than doubled the number of fraudulent returns identified and refunds prevented.

Some tax credit programs continue to be problematic. While the TIGTA said processing of First-Time Homebuyer Credit repayments has improved, almost $2.6 million in refunds were given in error. "In addition," the report said, "125,684 taxpayers also claimed more than $29.7 million in erroneous Nonbusiness Energy Property Credits, and 109,618 taxpayers claimed more than $159 million for the American Opportunity Tax Credit for students who, based on age, are unlikely to be pursuing an undergraduate degree or vocational certification."

The TIGTA made a number of recommendations, and based on the recommendations, the IRS is updating two major business systems, updating processing procedures, and initiating recovery procedures for credits that were refunded in error.

The report also noted that more fraud is being caught and stopped by the IRS. The agency identified $6.4 billion in false claims for tax refunds and prevented the issuance of $6.1 billion, or 95.3 percent, of these fake refunds. The IRS last year identified 39.1 percent more fraudulent tax refund attempts than the previous year. For example, the IRS identified 210,473 tax returns filed by prisoners for fraud screening, a 5.3 percent increase compared to last year.